Berko: Not enough negatives to pan French stock
By Malcolm Berko Taking Stock February 19, 2013 6:00PM
Updated: March 21, 2013 6:06AM
Dear Mr. Berko: Like most of us, I am looking for higher yields on my certificates of deposit. I have a $7,000 CD, which paid 4.5 percent, that recently came due, and a neighbor, whose husband works in France for an American drug company, told me that they recently bought 300 shares of a French utility called GDF Suez because it yields 9.2 percent. What do you think of this recommendation?
Dear RW: GDF Suez (GDFZY — $20) is a $124 billion revenue French utility company (water treatment, natural gas storage transmission, power generation, waste collection, hazardous waste treatment, oil and gas exploration and trading, nuclear power, liquefied natural gas terminals, and recycling) that earned $2.05 a share last year, with a handsome $1.93 dividend yielding 9.6 percent.
I remember reading an article about GDFZY in The Economist in 2008. At that time, GDFZY traded at $60 and earned $2.96, and the $2.03 dividend yielded 3.4 percent. That was 40 points ago. GDFZY trades at a reasonable 10 times earnings, has a sizable $30 billion in cash and trades at $16 under its $36 book value, though it does have $89 billion of debt. But GDFZY’s net profit margins of 3.3 percent compare unfavorably with the average 10 percent net profit margins of its American utility company cousins.
However, a friend of mine at Merrill Lynch who watches over European stocks believes that GDFZY’s balance sheet is strong. He also believes that its revenues and earnings will be stable for the coming few years and that the dividend should remain at the current rate. He thinks management is focusing on its fast-growing LNG and energy production markets.
He believes that GDFZY has promising developments in bio energy, electricity storage technology, smart energy and nonconventional gas. He thinks GDFZY will turn these developments into profits for its subsidiaries in Norway, Germany, the Netherlands, the United Kingdom, Denmark and the United States. He believes that future European growth will be driven by energy-efficient activities and that GDFZY’s lead in this endeavor could grow revenues by 30 percent to 40 percent in the coming five years.
There are just not enough negatives to pan this stock, and my Merrill friend thinks the stock could trade in the low $30s several years hence. GDFZY’s 1.3 billion shares have been sliding steadily in price since July 2008, when they traded at $63 a share. My Merrill guy believes that GDFZY’s share price touched bottom late last year at $19.30. So go ahead and get yourself 300 shares. The potential gain a few years down the road seems to easily outweigh the risks. And several large American mutual funds, including Fidelity and Vanguard, agree.
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